Nanochip's chips contain the company's MEMS read-write array, upper left, and atomic probe read/write head, lower left.

The Oakland, Calif., firm today received $20 million from a syndicate of institutional and industry investors, including Microsoft Corp. (Nasdaq: MSFT, News, Web). That is about $5 million more than the company sought during its second funding round. “I think the reason we got so much is that a lot of people wanted to invest. It definitely exceeded our expectations,” Gordon Knight, Nanochip's chief executive, told Small Times.

Nanochip is designing a MEMS-based silicon memory chip capable of storing multiple gigabytes of data. The chips could be used in a slew of electronic gear, including cellular phones, PDAs, digital cameras and laptops, as well as wireless devices. Its small size enables faster data manipulation and higher storage densities, Knight said. “We’re easily approaching 1 terabit per square inch.”

The company is angling to grab a share of the market for nonvolatile removable storage, both flash memory and microdrives. Unlike traditional flash memory cards that run on electronic chips, the company’s MEMS chips use mechanical movement to store data by etching it onto a substrate. Tiny actuators send an electromechanical current that triggers nanoscale atomic probes, or tips, to act as read/write heads.

Knight said the company’s proprietary MEMS chips enable faster data manipulation and higher storage densities.

Now comes the hard part: working out the bugs en route to a full-scale ramping up of production. Although the company successfully demonstrated the technology to investors when raising money, the next trick is to fine-tune specifications and sort out the manufacturing process. “The nice thing about this funding is that we can now concentrate on getting the product developed (within) a good window of opportunity,” Knight said.

To that end, some of the new money will be used to hire about 30 employees by the end of 2004 to accelerate research, trials and product development. Nanochip will not fabricate the chips itself. Instead, the company plans to license its technology to manufacturers of removable memory devices.

Two such “manufacturing partners” already have been lined up, one in Singapore and another in the United States, although Knight declined to identify them. If all goes well, the company could begin marketing products by the latter half of 2005.

Analysts have been watching Nanochip since its inception in 1996. “At one time they were talking about shipping product in ’03. That never happened. It sounds like they’ve regrouped, solved a few problems in the lab, and are making another run at it,” said Steve Cullen, director of semiconductor research at In-Stat/MDR.

The payoff could be huge, if Nanochip surmounts all the technical and market obstacles. The overall semiconductor market produced $32.5 billion worth of revenue in 2003, with flash memory accounting for nearly $12 billion. “If Nanochip got even 1 percent of that (amount), they’d be doing fabulously,” Cullen said.

Lead investor JK&B Capital followed the company for about 18 months. “While this is still an early-stage company, its technology has the potential to be quite disruptive in various market segments in terms of density, price per GB and performance,” said Al DeValle, a partner in the Chicago-based firm.

Other investors include New Enterprise Associates of Baltimore and AKN Technology Bhd, a Malaysian firm that provided $1.8 million in start-up capital to Nanochip. Microsoft also has taken an undisclosed equity stake in the company, part of the software giant’s continuing push into new hardware markets.